January 8, 2013

The US Senate's "fiscal cliff" package wasn't exactly eight maids a-milking--the traditional gift for the eighth day of Christmas--though it did apparently resolve the impending "milk cliff". Of greater relevance, the "tax extender" portion of the American Taxpayer Relief Act of 2012 passed by both the Senate and House of Representatives represented a gift to renewable energy producers and developers worth around $18 billion.

Two-thirds of that is attributable to the extension and modification of the Production Tax Credit (PTC) for wind and other renewable electricity projects. Renewable energy technologies have gained another year of generous support from US taxpayers. What remains to be seen is whether this win represents a last hurrah for the current US approach to renewable energy subsidies as lawmakers focus on shrinking an increasingly unsustainable federal budget deficit.

Based on the analysis of the bill provided in the Wall St. Journal, other energy-related beneficiaries included producers of cellulosic and algae-based biofuels, blenders of conventional biodiesel and other alternative fuels, purchasers of 2- and 3-wheeled electric vehicles, as well as various energy efficiency investments including efficient homes and appliances. Renewables should also benefit from other provisions of the bill, including a one-year extension of 50% bonus depreciation on project investments and a two-year extension of the 20% R&D tax credit.

Of course the problem with all of this is that it sets up additional cliffs at the end of 2013 and 2014, and thus perpetuates the expiration-anxiety roller-coaster that has confounded both manufacturers and investors in these technologies. Part of the blame for that rests with the process by which the Congress drafts and enacts such legislation. However, it's also a function of the unwillingness of current beneficiaries to shift their lobbying efforts to support realistic and predictable phaseouts of these subsidies, in light of renewables' improving competitiveness with conventional energy and the magnitude of future US fiscal problems. Considering that the current PTC for wind power is worth the equivalent of about 90% of today's futures price for natural gas, a proposal by the wind trade association for a six-year phaseout ending at 60% strikes me as too much like St. Augustine's plea for chastity.

The high-pressure negotiations to avert the fiscal cliff provided a poor venue for producing genuine tax reform, while giving supporters of the status quo a golden opportunity to attach measures such as these "extenders" that couldn't be amended before the expiration of the current Congress. The non-partisan Congressional Budget Office estimated that this bill actually increased federal spending by a net $330 billion over 10 years and added nearly $4 trillion to the deficit, compared to going over the cliff. It's not clear that the even higher-stakes debt-ceiling debate slated for early in the new Congress will be any more conducive to solving these challenges. But whether then or later in the session, it's going to become harder to avoid some form of tax reform and spending discipline that considers all energy subsidies in the context of their direct costs and indirect revenues. I'll be surprised if the current subsidies for renewables can escape again without major adjustments to reduce their high effective cost per unit of energy produced and increase their long-term bang for the buck.